SPX Analysis

S&P 500 Index (SPX)

Update 1/5/2017SPX rose rapidly after I entered the position, eventually resolving into a series of broad sideways swings. I exited for a loss as expiration approached to avoid assignment, which would have been a problem for my account, given SPX’s high share price.

Shares rose by 2.9% over 36 days, or a 29% annual rate. The options position produced a 24.5% loss on debit for a -248% annual rate.

This iron condor trading idea and structure come from trader Fauzia at Dough

My normal practice centers the iron condor on the present price. Her trade sets the high end of the profit zone near the current price, and the low end below it. Fauzia made no comment on her trade, but clearly the structure anticipates a trading zone stretching $100 below today’s level. a decline in the S&P 500.

And that’s a reasonable expectation. The Trump bump in the markets has brought SPX up from 2084 to 2214. Fauzia’s trade presumes a pullback that remains above resistance.

The high delta at the upper boundary increases the chance that the position will fail if the price rises, and yet also increases the credit I get for the trade. It’s the classic risk/reward ratio embodied in the folk wisdom, “Risk is the mother of profit.” This position is a big shout-out to Mom.

Like Fauzia, I shall use the JAN series of options, which trades for the last time 50 days hence, on Jan. 20.

Implied volatility stands at 14%, which stands in the 15th percentile of its annual range. The price used for analysis was $2,203.62.

Iron condor, short the $2,200 calls and long the $2,220 calls,
short the $2,100 puts and long the $2,080 puts,
sold for a credit and expiring Jan. 21.
Probability of expiring out-of-the-money

JAN Strike OTM Δ
Upper 2200 48.3% 53
Lower 2100 79.5% 19

The premium is $13.80, which is 69% of the width of the position’s wings.

The risk/reward ratio is 0.45:1.

Decision for My Account

I have entered a position on SPX as described above. The stock at the time of entry was priced at $2,202.77.

— Tim Bovee, Portland, Oregon, Nov. 30, 2016


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